Small loans hit big time

Push to attract microlenders pays off, helps satisfy
demand in region

Alison Musser, shown here with her daughter, Adeline, in May received a loan from Bad Girl Ventures for her company, Babies Travel Too.

In the two days after it opened this July, the Cleveland office of the Economic and Community Development Institute received more than 500 phone calls, 80 emails and 30 visitors.
In two days.
And though the initial goal in this region for the microlending organization was to lend $500,000 in the first year, vice president Eric C. Diamond said, “I'll probably have $500,000 out the door by Christmas. We'll do over a million in the first year.”
It appears those who worked to lure more microlenders — organizations providing smaller loans to smaller business borrowers — were right: Northeast Ohio is hungry for it.
Rachel Anzalone sure was. After being turned down twice in three years for bank financing and ultimately launching her business, Holistic Lakewood, with personal funds, Ms. Anzalone today is using a $20,000 ECDI loan to stock her shelves and add equipment.
The ECDI is not the only new group
helping to fill what some say was a gaping hole in the funding ecosystem, particularly after the only local microlender, WECO Fund Inc., collapsed recently.
Bad Girl Ventures, a microlending organization founded in March 2010 in Cincinnati, expanded to Cleveland in June 2011.
Both ECDI and Bad Girl Ventures were recruited to Cleveland by The Cleveland Foundation, which was driven by anecdotal stories of struggle and a 2011 study by Friedman Associates that showed there was an unmet need of $38 million for loans under $50,000 in Cuyahoga County, with the greatest gap among minority-owned businesses.
“I think that we as a community ... have in the last few years done a very good job of focusing on entrepreneurs and industries that tend to be high-tech and high-growth companies,” said Shilpa Kedar, program director for economic development for The Cleveland Foundation. “In the interim, I think we did not give as much attention to the small businesses that are more the population-serving businesses.”

Filling the gaps

Ms. Anzalone, who received her ECDI loan in June, has watched her retail sales nearly double in recent months. She is in the process of hiring her first employee.
Also growing her business is Alison Musser, who received in May a $25,000 low-interest micro-loan through Bad Girl Ventures and has more than doubled the inventory for her home-based baby equipment rental company, Babies Travel Too. She, too, is in the process of hiring her first employee.
“It's been huge,” Ms. Musser said of the new capital. “We thought that we could kind of fund this ourselves and quickly realized that that was not going to be very feasible.”
ECDI has approved 12 loans to date totaling $299,200. Its borrowers include a beauty salon, a home health care company, a soul food restaurant and a website called Divorce 2 Dating, Mr. Diamond said.
Helping to drive the microloan demand is the housing market's decline, which limited entrepreneurs' ability to borrow against their homes, said Candace Klein, founder and CEO of Bad Girl Ventures. Unemployment did, too, she said, because it hurt people's credit scores, reducing their eligibility for traditional loans.
Microlenders say another driver of their business is a disinterest of larger banks to do that type of lending because of greater risk, increased regulation and lower profit margins.
But the bigger banks are lending more small loans. Data from the U.S. Small Business Administration reveal that the level of SBA-guaranteed loans of $50,000 or less for the 11 months ending Aug. 31 across the Cleveland district, which includes all 28 northern counties in Ohio, is roughly back up to fiscal year 2008 levels.
And the smaller loans account for 48.7% of all SBA-guaranteed loans made during that period, too, said Gil Goldberg, director for the SBA's Cleveland district.
“I think that shows you that the banks ... have really stepped up and are doing their best to meet the needs of smaller borrowers,” he said. “These small loans help these businesses grow and become larger and employ more people. They, I think, are extremely important to job creation and the economy.”
Huntington National Bank leads the district in that kind of lending, Mr. Goldberg said.
KeyBank has increased the number and dollars of loans of $50,000 and less both this year and last year, said Tim Gretkierewicz, business banking executive for KeyBank's Cleveland district. The bank declined to provide exact figures.

Partnering up

Banks also are deploying capital through the microlending organizations themselves.
KeyBank funds the $25,000 low-interest loans awarded by Bad Girl Ventures in Cleveland and Columbus, and Huntington contributed $2 million to ECDI's $4 million fund.
“The nice thing about ECDI is they have a seven- or eight-year track record of making sure loans perform well and get repaid,” said Daniel Walsh, president of Huntington's Greater Cleveland region. “It's very hands-on.”
He's referring to the fact that these microlending organizations don't just put cash into smaller borrowers' hands — they provide technical assistance to mitigate the risk associated with such loans.
A typical microlender has a 15% default rate, said Mr. Diamond of the ECDI, which just started its first six-week training course in Cleveland.
“You can't just give these small companies money and hope they pay you back,” Mr. Diamond said. “One way or the other, they come out knowing more than they did when they went in there.”
Founded in Columbus in 2004, ECDI's rate of default stands at 6.4%, Mr. Diamond noted.
Bad Girl Ventures spends 10 weeks educating women entrepreneurs before funding them, Ms. Klein said, noting that so far, Bad Girl Ventures has a 0% rate of default on the 38 loans it's facilitated.
No matter their intangible value-add, are organizations like Bad Girl Ventures rendered obsolete if home equity lines again become a viable source of business capital or if traditional banks ramp up microlending?
Not the way Ms. Klein sees it. For one thing, banks like partnering with such groups, she said.
Also, bankers, Mr. Diamond noted, aren't in the business of training borrowers.
“No matter how much banks open up their doors again, you're never going to have banks say, "Let me walk you through what it means to be self-employed,'” Mr. Diamond said. “I think there's always going to be a need for microlenders that structure themselves like we do.”